DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

[Docket No. NHTSA 2004-17015; Notice 2]

Nissan North America, Inc.;

Petition for Exemption from Two-Fleet Rule Affecting Compliance

with Passenger Automobile Fuel Economy Standards

(PDF Version)

 

AGENCY: National Highway Traffic Safety Administration (NHTSA), Department of Transportation.

ACTION: Grant of petition for exemption from two-fleet rule.

SUMMARY: Nissan North America, Inc. (Nissan) filed a petition requesting exemption from the two-fleet rule for the 2006-2010 model years. The two-fleet rule, which is contained in the corporate average fuel economy (CAFE) statute, requires that a manufacturer divide its passenger automobiles into two fleets, a domestically-manufactured fleet and a non-domestically manufactured fleet, and ensure that each fleet separately meets the CAFE standards for passenger automobiles.

Nissan filed the petition because a change under the statute in the treatment of value added to a vehicle in Mexico will cause one of that company's passenger automobiles, which is manufactured in Mexico, to be reclassified from non-domestic to domestic. The loss of these automobiles, which are relatively fuel-efficient, will cause its non-domestic fleet to fail to comply with the CAFE standards for passenger automobiles.

The CAFE statute requires the agency to grant such a petition unless it finds that doing so would result in reduced employment in the U.S. related to motor vehicle manufacturing. To determine if such a reduction would result, NHTSA compared vehicle prices and sales under two scenarios: a baseline scenario in which Nissan would not have an exemption and would need either to pay penalties for noncompliance or adopt any one of a number of optional courses of action to achieve compliance; and a scenario in which Nissan would have an exemption and would not bear any of the costs of the baseline scenario. The agency then attempted to estimate the effect of the sales changes on employment for each of the options. The analysis indicated virtually no employment effect for the option most likely (on the basis of cost) to be chosen by Nissan and only slight negative employment effects for the other options.

Nissan also pointed out employment effects that are not accounted for in our economic analysis. If we deny the petition, Nissan would likely purchase fewer parts from U.S. suppliers and more parts from foreign suppliers in order to recontent one of its vehicles. The result would be fewer American workers producing components to be used in Nissan cars. We are unable to quantify with precision the number of jobs potentially lost from denying the petition. It is likely, however, that more jobs would be lost if we deny the petition than would be lost if we grant it.

In sum, the evidence does not support a finding that granting the petition would reduce motor vehicle manufacturing employment in the U.S. The evidence suggests instead that granting the petition would likely help retain American jobs that might otherwise be sent overseas. Accordingly, the agency will permit Nissan to combine its domestic and non-domestic passenger automobile fleet for model years 2006-2010.

DATES: EFFECTIVE DATE: October 1, 2005

 

SUPPLEMENTARY INFORMATION:

Table of Contents

    1. Glossary

    2. Statutory Background of the Two-fleet Rule

      1. Energy Policy and Conservation Act, as Originally Enacted in 1975

      2. 1980 Amendments

      3. 1994 Amendments

    3. Nissan's Petition for Exemption

      1. Statutorily Caused Change in Sentra's Classification from Non-domestic to Domestic

      2. Nissan's Assessment of Employment Impacts of Not Granting its Petition

    4. Notice of Petition and Request for Comments

    5. Public Comments Submitted in Response to Notice of Petition

    6. Additional Information Submitted by Nissan

    7. Agency Evaluation of Merits of Nissan's Petition

      1. Eligibility of Nissan to Petition for Exemption

      2. Extent of the Agency's Discretion to Grant or Deny Nissan's Petition

        1. Discretion to Deny only upon Finding of Adverse Employment Impact

        2. Probability of Adverse Employment Impact must be Reasonably High

      3. Consistency of Nissan's Petition with Congressional Intent

      4. Methodology for Determining Net Employment Impacts

        1. Rationale for the Analysis

        2. Outline of Analytical Steps

      5. Details of the Analysis

        1. Potential Compliance Options Nissan Could Choose

          1. Options in Nissan's Petition

          2. Additional Options Considered by the Agency

        2. Impacts of Options on Prices of Nissan's Automobiles

        3. Impacts of Price Changes on Automobile Sales

          1. Estimation of Impacts Due to Price Changes

          2. The Import Buyer Phenomenon

        4. Net Impact on Employment

    8. Agency Decision

      1. If Not Exempted, Nissan would be Most Likely to Select Least Cost Options

      2. Agency Analysis of Least Cost Options Shows Granting Petition is Unlikely to Impact Employment

      3. Unaccounted for Upstream Supplier Employment Impacts of Least Cost Options are Likely to be Positive

      4. Net Employment Impacts of Granting Nissan's Petition are Likely to be Positive

      5. Conclusion

    9. Analyses and Impacts

 

 

I.   Glossary

We are providing a glossary to define some of the key terms in this notice. Some of the terms are used in a way that is broader (domestic automobile and domestic content) or narrower (non-domestic automobile and non-domestic content) than the meaning they are given in the dictionary or common usage. Most notably, "domestic content" refers to content from not only the U.S., but also Canada and, beginning in the next model year, Mexico as well. Thus, beginning in the 2005 model year, "non-domestic content" will refer to content from countries other than the U.S., Canada and Mexico. In other words, domestic content will mean North American content.

These departures from ordinary meaning are necessary because of the special meaning given the terms by statute. In particular, their meanings are governed by the provisions of the CAFE statute, i.e., the Energy Policy and Conservation Act (EPCA), as modified by the Automotive Fuel Efficiency Act of 1980 and the 1994 amendments implementing the North American Free Trade Agreement (NAFTA).

As used in this notice, these terms have the following meanings:

Assembly: a part of an automobile made within the U.S., Canada, or Mexico whose component parts are substantially transformed by the manufacturing process into a new and different article of commerce.

Baseline scenario: the state of the world if Nissan does not have an exemption during model years 2006-2010.

Domestic content: beginning in model year 2005, components that are wholly grown, produced or manufactured in the U.S., Canada or Mexico or substantially transformed during the manufacturing process in the U.S., Canada or Mexico into a new and different article of commerce.

Domestic passenger automobile: a passenger automobile with 75 percent or more domestic content.

Exemption scenario: the state of the world if Nissan has an exemption during model years 2006-2010.

Non-domestic passenger automobile: a passenger automobile with less than 75 percent domestic content.

North America: within the borders of U.S., Canada, or Mexico.

Recontenting: replacing domestic content of a passenger automobile with non-domestic content for the purpose of causing the automobile to be classified as a non-domestic automobile.

II. Statutory Background of the Two-fleet Rule

A.       Energy Policy and Conservation Act, as Originally Enacted in 1975

In 1975, Congress enacted the Energy Policy and Conservation Act (EPCA), mandating that passenger automobiles and non-passenger automobiles meet CAFE standards. Pub. L. No. 94-163. See 49 U.S.C. 32901 et seq. When Congress was considering EPCA, it was concerned that U.S. manufacturers might aid their efforts to comply with the standards by importing and selling increasing numbers of fuel-efficient passenger automobiles manufactured abroad. The importation and sale by U.S. manufacturers of such passenger automobiles would have helped them to meet fuel economy standards, but at the cost of decreasing employment in the U.S. automobile industry. To forestall this possibility, Congress adopted a provision, known as the "two-fleet rule," requiring that each manufacturer's passenger automobiles be separated into two fleets, domestic and non-domestic, and that each of the fleets separately comply with the fuel economy standards for passenger automobiles. See 49 U.S.C. 32904(b)(1).

Under the "two-fleet rule," as enacted in 1975, an automobile was considered to be domestically manufactured, and included in a manufacturer's domestic fleet, if at least 75% of cost to the manufacturer of manufacturing the automobile was attributable to value added in the U.S. or Canada. The rule treated passenger automobiles not meeting this 75% threshold as non-domestically manufactured, even if they were assembled in the U.S. or Canada.

B. 1980 Amendments

The two-fleet rule initially did not affect foreign manufacturers of passenger automobiles. All of their automobiles were anufactured abroad using assemblies and parts made abroad and thus were classified as non-domestic.

However, within several years of the enactment of EPCA, one foreign manufacturer, Volkswagen, began manufacturing passenger automobiles in the U.S. Although these passenger automobiles were assembled in the U.S., and a significant portion of their content was domestic, they were treated as non-domestic because they had less than 75% of their value added in the U.S. or Canada.

These passenger automobiles, which were more fuel-efficient than other Volkswagen's non-domestic passenger automobiles, helped Volkswagen's overall non-domestic fleet comply with CAFE standards. Although using U.S. or Canadian components might have been cheaper than using non-domestic ones, Volkswagen restricted the use of U.S. or Canadian components in those passenger automobiles to keep those U.S.-built passenger automobiles from switching from non-domestic to domestic under the two-fleet rule.

Volkswagen's restricting the use of parts made or assembled in the U.S. or Canada in passenger automobiles produced in a U.S. assembly plant demonstrated that the two-fleet rule, which was intended to prevent job losses in the U.S. automobile industry, could also operate to prevent increases in new U.S. jobs. Foreign manufacturers wishing to avoid undesirable impacts of the two-fleet rule might either limit or forego the use of U.S. or Canadian parts in passenger automobiles manufactured in U.S. plants or simply choose not to invest in building those plants.[1]

Concerned that the two-fleet rule might have the unintended effect of discouraging foreign manufacturers from producing passenger automobiles in the U.S. or encouraging them to limit artificially the amount of U.S. or Canadian parts if they did, Congress authorized exemptions from the two-fleet rule in the Automotive Fuel Efficiency Act of 1980 (1980 amendments). (Pub. L. No. 96-425.) The amendments made manufacturers that either began manufacturing automobiles in the U.S. after December 22, 1975, and before May 1, 1980, or began manufacturing automobiles in the U.S. after April 30, 1980 and completed at least one model year of production before December 31, 1985 eligible to petition NHTSA for relief from the two-fleet rule. The amendments also provided that the agency must grant a manufacturer's petition unless it determines that doing so would result in reduced employment in the U.S. related to motor vehicle manufacturing.[2] See 49 U.S.C. 32904(b)(6)(B).[3]

The agency must publish its decision whether to grant or deny a petition by the 90th day after the receipt of an exemption petition or the petition is deemed granted by operation of law. See 49 U.S.C. 32904(b)(6)(C). To alleviate concerns that granting an exemption from the two-fleet rule might provide a foreign manufacturer with an opportunity to earn or use credits not available to its domestic counterparts, Congress also provided that any manufacturer receiving an exemption could not earn or use credits during any year that the exemption was in effect.[4] See 49 U.S.C. 32904(b)(8).

The 1980 amendments contained a number of other provisions intended to foster job growth in the U.S. motor vehicle industry. In an effort to foster joint ventures between U.S. and foreign manufacturers while providing opportunities for increased jobs in the U.S., the 1980 amendments allowed domestic manufacturers to include, on a one-time basis, up 150,000 non-domestic passenger automobiles in their domestic fleets for up to four years if certain conditions were met. One of the conditions was that the automobiles have at least 50% domestic content in the first model year and 75% domestic content before the end of the 4th model year. See 49 U.S.C. 32904(b)(5).

C. 1994 Amendments

In adopting legislation implementing the North American Free Trade Agreement (NAFTA), Congress amended the two-fleet rule in 1994 to provide, beginning not later than the 2005 model year, that a passenger automobile is considered to be "domestically manufactured" if at least 75 percent of the cost to the manufacturer of that automobile is attributable to value added in the U.S., Canada or Mexico. See 49 U.S.C. 32904(b)(3)(A). Thus, beginning in that model year, value added in Mexico will no longer be treated as non-domestic content. Instead, it will be treated as domestic content.[5]

III. Nissan's Petition for Exemption

A. Statutorily Caused Change in Sentra's Classification from Non-domestic to Domestic

Nissan submitted a petition for exemption from the two-fleet rule on January 23, 2004. It requested exemption for the 2006-2010 model years or until circumstances remove the need for an exemption. Nissan noted that, beginning in the 2005 model year (MY), the Sentra, which is manufactured in Mexico, will switch from its non-domestic fleet to its domestic fleet because the value added in Mexico will change from non-domestic to domestic content. The Sentra is one of the more fuel-efficient passenger automobiles in Nissan's current non-domestic fleet. This switch will lower the CAFE of Nissan's non-domestic fleet below the CAFE standard for passenger automobiles and raise the CAFE of Nissan's domestic fleet well above the standard.[6]

Nissan said:

* * * [I]t may be forced to decrease domestic content and outsource the production of one or all of its domestically manufactured vehicles-i.e., the Sentra, Altima or Maxima-in order to offset this imbalance. Decreasing the domestic content level of the Sentra could result in a decrease in the use of U.S.-made components, such as radiators, air conditioners, suspensions, engine parts and some engines, currently used in the Sentra. Likewise, decreasing the domestic content level of the Altima or Maxima, which currently make up Nissan's domestic fleet, would mean decreasing production at NNA's [Nissan's] Smyrna, Tennessee plant and reducing domestic engine production at the Decherd, Tennessee plant. Such reductions in domestic production of the Altima or Maxima could likely lead to reduction in employment at Nissan's Tennessee plants. Accordingly, an exemption from the [two-fleet] provision is necessary for Nissan to maintain existing levels of Sentra production in Mexico, and Altima and Maxima production at Smyrna, Tennessee, as well as the corresponding levels of engine and component production in Decherd, Tennessee. (at 4)


Nissan said further:

[A]n exemption from separate calculations under the CAFE program will allow Nissan to continue its current pace of expansion in U.S. production in model years 2006-2010 and to increase the level of local content beyond 75% in additional vehicles, without becoming subject to CAFE penalties. Failure to grant the petition will force Nissan to reconsider the current ramp up in U.S. investment as resources are diverted from expansion in the United States to addressing the CAFE issue. (at 8)

B. Nissan's Assessment of Employment Impacts of Not Granting its Petition

Nissan's petition states that recontenting some of its passenger automobiles would reduce employment by the U.S. automobile equipment suppliers (at 14). Although Nissan's petition did not provide any estimates of costs (or savings) that might be associated with any such recontenting, the company later submitted data regarding this issue at NHTSA's request.

It petition also states (at 18) that even if the agency does not grant the requested exemption and the sale of Nissan's imported passenger automobiles decline as a result, "it is unlikely that domestic manufacturers would capture these lost sales" because "Nissan purchasers typically prefer import vehicles."

IV. Notice of Petition and Request for Comments

NHTSA published a notice announcing receipt of Nissan's petition on February 5, 2004 (69 FR 5654). The notice briefly summarized Nissan's petition and solicited comments on the effect that granting the petition might have on motor vehicle manufacturing related employment in the U.S. The notice discussed two approaches NHTSA might take in considering the Nissan petition. We described an analytic approach under which NHTSA would determine the difference between projected total motor vehicle-related employment in the U.S. if the petition were denied, and the projected total level of U.S. motor vehicle-related employment if the petition were granted.

The agency sought specific information from manufacturers of passenger automobiles within the same market segments as Nissan's passenger automobiles. In order to better assess Nissan's claim in its petition that removing domestic parts from a domestic vehicle model and substituting non-domestic parts - thereby moving domestic vehicles into its non-domestic fleet - would be prohibitively expensive, we asked manufacturers to provide information regarding costs or savings likely to result from different degrees of recontenting.

We also solicited comments on the contention in Nissan's petition that it would be unlikely that domestic manufacturers would capture sales lost by Nissan if its petition were denied and Nissan's vehicles became more expensive because "Nissan purchasers typically prefer import vehicles." We requested that commenters address the extent to which any such import buyer preference might be relevant to the post-2005 marketplace. In particular, we asked for information regarding any vehicle models expected to compete, even partially, with any Nissan passenger automobiles.

The notice also set forth and explained our preliminary determination that no environmental impact analysis would be required under existing law. We noted that although NHTSA prepared an environmental assessment of the effects of granting a Volkswagen petition under 32904(b)(6) in 1981, several U.S. Circuit Courts of Appeals have since held that compliance with the National Environmental Policy Act is unnecessary in instances in which an agency has little or no discretion regarding the decision it is making.[7] We noted further that under the CAFE statute, the only issue the agency is permitted to consider in deciding whether to grant or deny Nissan's petition is the impact on U.S. automobile manufacturing-related employment. The notice observed that NHTSA is required to grant the petition unless it finds that doing so would reduce such employment. It noted further that if we took no action in the time prescribed by the statute, the statute provides that the petition is automatically granted. Accordingly, we concluded that granting the petition would not be a "major Federal action" within the meaning of NEPA.

The notice also set forth and explained our preliminary determination that no regulatory impact analysis, other than that specified in 32904(b)(6), would be required under existing law. We said that since our decision would not result in the issuance of a "rule" within the meaning of the Administrative Procedure Act or Executive Order 12866, Regulatory Planning and Review, neither the requirements of the Executive Order nor those of the Department's regulatory policies and procedures apply.

V. Public Comments Submitted in Response to Notice of Petition

NHTSA received two comments in response to its February 5, 2004 notice. The United Automobile Workers (UAW) filed comments. Three manufacturers, General Motors (GM), DaimlerChrysler (DC) and the Ford Motor Company (Ford), collaborated in the filing of a single joint set of comments. An array of elected officials, Governor Haley Barbour of Mississippi, Governor Phil Bredesen of Tennessee, U.S. Senators Trent Lott, William H. Frist, Lamar Alexander, and Thad Cochran, and U. S. Representatives Chip Pickering, Bart Gordon, and Lincoln Davis, also submitted letters, all of which supported Nissan's petition.

Focusing on Nissan-related automotive employment in the U.S., the elected officials compared employment levels now, prior to the change in treatment of value added in Mexico, to employment levels that might exist after the change, in the absence of an exemption. Senators Lott and Cochran stated that automobile industry employment in the U.S. would suffer if Nissan were denied the exemption. In their view, denying the exemption would make it necessary for Nissan to pay CAFE civil penalties or reduce the domestic content of their vehicles. Either course would result in reduced automobile manufacturing employment in the U.S. However, they said that granting the exemption would allow Nissan to continue expansion of U.S. production and employment.

Senators Frist and Alexander submitted a joint letter expressing support for the Nissan petition. The letter stated that the impact of the NAFTA amendments could reduce the amount of American components in Nissan's Mexican-built passenger automobiles or lead Nissan to reduce production of its U.S. built passenger automobiles. Either case would lead to U.S. job losses and harm to the U.S. automobile industry. The letter also said that the exemption provision in the 1980 amendments was created expressly to address the situation now faced by Nissan. Given Nissan's plans to expand U.S. production, both Senators indicated that granting the exemption would, in their view, further stimulate growth in the U.S. automobile industry.

The other elected officials, Governors Bredesen and Barbour and Representatives Pickering, Gordon, and Davis, expressed similar sentiments. Governors Bredesen and Barbour also supported granting Nissan's request on the grounds that doing so would increase employment in their states and the U.S. automobile industry as a whole.

The UAW submitted comments opposing Nissan's request. The UAW stated first that Nissan, like other manufacturers affected by the NAFTA amendments, had over ten years to plan for the change in treatment of value added in Mexico. Accordingly, the organization argued that Nissan should not be granted any special relief. The UAW also argued that Nissan could take other steps to avoid CAFE penalties besides seeking exemption for the two-fleet rule. One option suggested by the UAW was that Nissan could shift production of the 350ZX vehicles and its Infiniti line to the U.S. According to the UAW, such shifts would allow Nissan to avoid CAFE penalties and increase domestic auto-related employment.

The organization also argued that granting Nissan's petition would provide Nissan with a distinct competitive advantage over other manufacturers by allowing Nissan to avoid CAFE compliance costs that other manufacturers must bear. According the UAW, this competitive advantage would harm employment in the U.S. automobile manufacturing sector by causing the loss of sales by other manufacturers, both foreign-based and U.S.-based, whose automobiles have higher domestic content than those produced by Nissan. Moreover, even if Nissan buyers prefer to buy Japanese nameplate vehicles, the UAW contends that two Japanese producers, Toyota and Honda, have higher domestic content than Nissan. Therefore, even if Nissan's sales increases came only at the expense of Toyota and Honda, U.S. employment would still suffer. The UAW also argued that the idea that "import buyers" will only buy other imports might be outmoded. Increases in quality and product offerings by Detroit-based producers have, in the UAW's view, narrowed the differences between foreign and domestic brands to the degree that the "import buyer" phenomenon may no longer exist.

The joint comment filed by GM, Ford, and DC also opposed the Nissan petition. These manufacturers stated that the legislative history of the 1980 amendments, which authorized the exemption, demonstrates that Congress intended to encourage foreign manufacturers to begin producing vehicles in the U.S., rather than provide a benefit to manufacturers with established U.S. assembly plants.

As Nissan has been producing vehicles in U.S. plants for many years, GM, DC and Ford argued that granting the petition would accomplish little more than providing the company with a competitive advantage not envisioned by Congress when it authorized the exemptions. According to GM, DC and Ford, this competitive advantage would include avoiding the administrative costs of maintaining two fleets and gaining the flexibility of being able to combine all of its annual production into a single fleet.

GM, DC, and Ford also stated, as did the UAW, that granting the petition would be inequitable. They stated that Nissan had ample notice of the eventual effects of the NAFTA amendments. Accordingly, they said that Nissan should bear the brunt of those effects, particularly since it already knew about those effects when it moved the production of the Sentra from Tennessee to Mexico.

None of the comments or letters submitted to the agency contained any data responsive to several requests in the agency's notice for data. The agency's notice specifically requested that commenters provide data regarding the costs or savings of changing the content of their vehicles from domestic to non-domestic sources. The notice also requested that commenters provide information and data about vehicles expected to compete with Nissan automobiles and solicited views regarding the existence and impact of the "import buyer" phenomenon cited by Nissan in its petition. No views on competing vehicles or that phenomenon were submitted.

VI. Additional Information Submitted by Nissan

In response to an agency request, Nissan submitted additional data regarding its projected CAFE on February 19, 2004. On February 24, 2004, the agency met with representatives of Nissan and requested additional data to assist the agency in evaluating the petition. To allow the agency to calculate Nissan's future CAFE, the potential for penalties, and the cost of various options that Nissan might pursue if there were no exemption, we requested that Nissan provide information regarding product plans, disaggregated sales information, and disaggregated fuel economy information for the 2004 through 2010 MYs. In order to evaluate the impacts of shifting different models from the domestic to the non-domestic fleet, the agency also requested specific information about changing the content of the Sentra, Altima and Maxima, including how allocation of costs impacts prices of Nissan vehicles.

Nissan responded to the agency's requests by providing several written submissions, including ones on March 4, and March 15, 2004. Each of the submissions was accompanied by a request that portions of the data be granted confidential treatment by the agency. Public versions of these submissions and its earlier February 19 submission have been placed in the docket.

Nissan's March 15, 2004 submission contained additional data regarding the dollar value, on a per-vehicle basis, of the domestic content that would need to be replaced by non-domestic content for the vehicle that would be the most likely candidate for this strategy. Nissan also described how this recontenting would affect the costs of building this vehicle on a per-vehicle basis. Nissan then compared the costs of pursuing the recontenting option with the costs of paying CAFE penalties.

Nissan also revisited its contention if it lost sales due to the cost effects of the NAFTA amendments, its lost customers were more likely to purchase import nameplate vehicles than domestic nameplate brands. In Nissan's view, this "import buyer" phenomenon would result in a loss of jobs in the U.S. automotive industry if Nissan were not exempted and were instead to pursue a recontenting option or choose to pay CAFE penalties.

Although it did not provide any data supporting these arguments, Nissan presented two scenarios in support of its argument that the "import buyer" phenomenon would contribute to the loss of U.S. jobs if its petition were denied. In one scenario, Nissan assumed that it would choose to pay CAFE penalties for its non-domestic fleet and that the costs of these penalties would be allocated to the models in that fleet (350Z, Infiniti G35, G35 Coupe, Infiniti M45, and Infiniti Q45). Nissan then asserted that its own internal sales research indicated that buyers of these models would most likely be diverted to imported vehicles rather than domestically produced import nameplate models and traditional domestic brands.Even if lost Nissan sales resulted in increased sales of domestically produced vehicles, Nissan contended that these sales increases would be diffused across a number of vehicle models and brands. In Nissan's view, this wide distribution of increased sales would, at best, result in such small increases in sales of different vehicle models that the manufacturers of these vehicles would not need to hire new workers to meet additional demand.

The second scenario discussed by Nissan was based on the outcomes resulting from its recontenting a particular vehicle. Nissan presented data showing the dollar value of domestic parts that would need to be replaced with non-domestic parts to reduce the vehicle's domestic content to less than 75%. According to Nissan, this recontenting scenario would result in the loss of hundreds of American jobs, even if only some of the domestic content in the vehicles originated in the U.S. Nissan also stated that recontenting would make such job losses almost inevitable, since the loss of business would impact a small number of supplier firms that produce high volumes of parts for a single customer and could not readily replace the work done for that customer with work for another customer.

VII. Agency Evaluation of Merits of Nissan's Petition

A. Eligibility of Nissan to Petition for Exemption

Determining the eligibility of a manufacturer to petition for exemption from the "two-fleet" rule requires examination of the agency's statutory authority for granting such relief. Section 32904(b)(6)(A) provides that authority as follows:

(6)(A) A manufacturer may file with the Secretary of Transportation a petition for an exemption from the requirement of separate calculations under paragraph (1)(A) of this subsection if the manufacturer began automobile production or assembly in the United States-

(i) after December 22, 1975, and before May 1, 1980; or

(ii) after April 30, 1980, if the manufacturer has engaged in the production or assembly in the United States for at least one model year ending before January 1, 1986.

Section 32904(b)(6)(A) states that in order for a manufacturer to be eligible to petition for exemption, the manufacturer must either have begun producing or assembling automobiles in the U.S. after December 22, 1975, and before May 1, 1980, or have begun manufacturing automobiles in the U.S. after April 30, 1980 and completed at least one model year of production before December 31, 1985. Nissan meets subparagraph (ii) of 32904(b)(6)(A). Nissan began automobile production in the U.S. after April 30, 1980. It did so by beginning to produce trucks in Tennessee in 1983.[8] By January 1, 1986, it had completed "three model year's worth of automobile production after April 30, 1980 and before January 1, 1986." (Nissan petition, at p. 4)

B.       Extent of the Agency's Discretion to Grant or Deny Nissan's Petition

If a manufacturer meets the threshold eligibility requirements in 32904(b)(6)(A), the agency must then consider the extent of its discretion to grant or deny a petition under 32904(b)(6)(B). That discretion, and thus the scope of the agency's inquiry, is very limited. Section 32904(b)(6)(B) provides (B) The Secretary of Transportation shall grant the exemption unless the Secretary finds that the exemption would result in reduced employment in the United States related to motor vehicle manufacturing during the period of the exemption. .[9]

(Emphasis added.)

There are two particularly important aspects of that provision.

1. Discretion to Deny only upon Finding of Adverse Employment Impact

The first is that Congress did not simply mandate that employment impacts be considered in deciding whether to grant or deny a petition, thus leaving open the possibility that other factors could be considered. It went much further, saying that the only circumstance in which the agency may deny a petition is if the agency is able to find and does find that granting an exemption would result in an adverse impact on employment. The directive in 32904(b)(6)(B) is clear, unambiguous and free of any language permitting or implying that any issues other than the impact on employment may factor in the agency's decision. The only statutorily relevant issue is the impact on employment.

Accordingly, the agency is foreclosed from basing its decision whether to grant or deny on additional factors as suggested by the UAW and GM, DC and Ford. The UAW urged us to take into consideration whether Nissan had adequate notice that the NAFTA amendments would eventually operate so as to shift its Mexican production from one fleet to another. We are also constrained from considering, beyond the impact that granting the exemption may have on employment, whether granting Nissan's petition might otherwise be inequitable in some fashion.

2. Probability of Adverse Employment Impact must be Reasonably High

The second is Congress provided that in order to make a finding sufficient to enable the agency to deny a petition, NHTSA must find that an adverse employment effect "would" result from granting an exemption, not merely that such an effect might or could result. We believe it insufficient for the agency to find that there is a mere possibility of an adverse employment effect or even that such an effect is more likely than not. The agency would need to find a still higher degree of likelihood, a reasonable certainty, that an adverse effect would result from granting an exemption.[10]

C. Consistency of Nissan's Petition with Congressional Intent

In their joint comment, GM, DC and Ford contended that the legislative history of the exemption provision compels the agency to consider the Nissan petition as untimely and inconsistent with statutory intent. Relying primarily on an excerpt from the House Committee Report on the 1980 amendments stating that the exemption provision was "designed to provide incentives to new domestic manufacturers" (H. Rep. No. 96-1026, at 14 (1980)), these manufacturers stated that Congress meant for 32904(b)(6)(B) to operate only as an incentive to induce manufacturers to build new plants in the U.S. during a limited time period from 1975 to 1986. Since the window for building such plants has long been closed, GM, DC and Ford argued that allowing Nissan to benefit from an exemption in 2004 "stretches" the statutory intent of the 1980 Amendments.

Neither the language of the statute nor the legislative history demonstrates that Congress intended to restrict the operation of this "job related" provision once a manufacturer began producing automobiles between 1975 and 1986. Congress did specify certain time limits, e.g., that a qualifying manufacturer must have begun or must begin U.S. production within a specific period. To encourage foreign manufacturers to begin production in the U.S., Congress limited the opportunity to petition for exemption from the two-fleet rule to only those manufacturers that began production within that 10-year window. Congress also specified that an exemption would ordinarily be effective for five model years. However, it did not place any time limits on when a qualifying manufacturer may apply for an exemption. The absence of such a limit in the statute, particularly when other time limits are present, provides compelling evidence that Congress did not intend to set a time limit restricting when qualifying manufacturers could apply.

This conclusion is reinforced by the conference report on the 1980 amendments:

The conference substitute allows manufacturers to petition for an[d] receive an exemption any time after the date of enactment of the Act.

(H. Rep. No. 96-1402, at 12 (1980)) (Emphasis added.)

The joint comment of GM, DC and Ford cite an excerpt from the House Committee report, (at 14),to support their assertion that the exemption provision was intended primarily to encourage the building of new vehicle plants.[11] However, examination of the entire paragraph from which this excerpt was drawn reinforces our view that the primary purpose of the exemption provision is to preserve or expand employment in the U.S. automobile industry when the two-fleet rule would otherwise limit the use of components made in the U.S. or Canada in U.S. assembly plants:

Section 4(a) of the Committee Amendment is designed to provide incentives to new domestic manufacturers to increase the local content of their vehicles, as recommended by DOT. It is a "job related" provision.

(H. Rep. No. 96-1026, at 14 (1980)).

The Conference report contained similar language:

The purpose of this provision is to encourage increased employment in the United States..

(at 13) Employment in the U.S. could be benefited not only by inducing foreign manufacturers to begin production in the U.S., but also by granting petitions for exemptions from the two-fleet rule any time that the rule would encourage a manufacturer to limit or reduce the domestic content of its vehicles, thus adversely affecting employment related to motor vehicle manufacturing in the U.S.

D. Methodology for Determining Net Employment Impacts

1. Rationale for the Analysis

As noted above, the statute requires that we grant Nissan's petition unless we find that doing so would result in reduced employment related to motor vehicle manufacturing in the U.S. To assess whether such a reduction would result, we needed to examine two different scenarios: a baseline scenario in which there was no exemption and a scenario in which there was an exemption.

In the baseline scenario, Nissan would remain subject to the two-fleet rule and continue to be required to ensure that its domestic and non-domestic fleets separately comply with the CAFE standard for passenger automobiles. The increase in domestic content of Sentra due to the operation of the 1994 amendments would cause that vehicle model to shift from that company's non-domestic fleet to its domestic fleet, causing its non-domestic fleet to fall below the CAFE standard. Nissan would need either to pay penalties for noncompliance or implement options that would enable it to eliminate the CAFE deficit. Our analysis assumes that Nissan will pass the costs of those actions along to consumers in the form of higher automobile prices.

In the exemption scenario, the petition would be granted, exempting Nissan from the two-fleet rule. Since Nissan would have a single fleet that would meet the CAFE standard for passenger automobiles, Nissan would not need to take any of the actions described in the baseline scenario. Thus, Nissan would not incur any costs that it would need to pass along to consumers by raising prices. Compared to the baseline scenario, this would put Nissan in a more advantageous position vis vis its competitors, possibly inducing consumers to buy more Nissan automobiles and fewer competing automobiles.

2. Outline of Analytical Steps

The following steps were taken in conducting our analysis.[12]

(i) First, the Agency investigated the costs of Nissan's options under the baseline scenario: paying penalties for noncompliance or taking one of several alternative courses of action to comply with the CAFE standard. Nissan described three options in the petition. We considered Nissan's three options, plus three additional options. We dropped one of the additional options on the grounds of prohibitive cost, and included the remaining five options in our analysis. We then made assumptions about how the cost of each option in our analysis would affect the price of Nissan's products.

(ii)    Second, we identified automobiles that compete with Nissan's automobiles. This was accomplished using six different market classifications defined by Automotive News (small economy, sporty touring, mid-range standard, mid-range premium, upscale near luxury, and upscale luxury). These automobiles were judged to be close competitors of the Nissan automobiles whose prices would be affected by our granting the petition. A list of these automobiles, arranged by category, is contained in Appendix A of this notice.

(iii)   Third, in order to predict the substitution of automobiles that would occur annually as a result of lower prices of Nissan automobiles in the exemption scenario, the agency employed statistical models known as multinomial logit (MNL) models. These models predict how Nissan's cost savings and resulting lower prices would impact sales within these discrete market segments.[13] Six MNL models were estimated, one for each market classification.[14] These models predict the number of competitors' sales that are lost, given a reduction in the price of one or more Nissan automobiles.

(iv)  Lastly, we converted the annual changes in automobile sales into annual changes in employment. Using data showing the U.S. man-hours expended in the assembly of automobiles and the production of engines and transmissions, we computed total U.S. jobs in both the baseline scenario and the exemption scenario. Our analysis also accounted for impacts on suppliers of engines and transmissions, but not other "upstream" parts suppliers. The difference of the two is the net employment impact of granting the petition.[15]

E. Details of the Analysis

1. Potential Compliance Options Nissan Could Choose

In performing the baseline analysis, NHTSA assumed that Nissan would react to the statutorily caused change in the composition of its non-domestic and domestic fleets as any rational profit maximizing automobile manufacturer would, i.e., by evaluating the options available to it and selecting the lowest cost option that enables its non-domestic passenger automobile fleet to comply with CAFE standards. Nissan identified three options in its petition: (1) & (2) reduce the domestic content in either the Sentra or Altima so it is reclassified as a non-domestic vehicle, or (3) pay CAFE penalties. In deciding which options to include in its analysis, NHTSA examined these options, plus three others: move Infiniti and 350ZX production to the U.S. (causing those relatively fuel-inefficient vehicles to become domestic), improve the CAFE of its non-domestic fleet sufficiently to eliminate the CAFE shortfall, or improve the CAFE of its non-domestic fleet up to the point that paying CAFE penalties becomes less expensive than the cost of further improvements and then pay those penalties.

i. Options in Nissan's Petition

Nissan's petition listed three potential compliance options it would consider if its petition were denied. One option would be to move the Sentra from its domestic fleet to its non-domestic fleet by replacing domestic content with non-domestic content. A second option would be to move the Altima to its non-domestic fleet by reducing the domestic content of that automobile. A third option would be to pay CAFE penalties.

The first two options involve reducing the domestic content of either the Altima, currently built in the U.S., or the Sentra, currently built in Mexico. In either case, the automobiles' domestic content would be reduced to less than 75%, making these automobiles part of Nissan's non-domestic fleet, thereby balancing the CAFEs of the two fleets and making Nissan compliant with the current standard. If the domestic content of the Mexican built Sentra were reduced to below 75% so that it is reclassified as a non-domestic automobile, Nissan would comply with 27.5-mpg passenger automobile standard in both of its fleets. The same is true if the domestic content of the U.S. built Altima and Maxima were reduced to below 75%.

Nissan's petition states that the company's most likely response to not obtaining an exemption would be to remove domestic content from the Sentra. Although NHTSA solicited comments and data regarding the costs of removing domestic content in its February 5, 2004 notice, we did not receive any information in response to that request. At the agency's request, Nissan later provided that information for its vehicles.

Because the agency does not have the data needed to determine the costs of content shifting, we relied on an analysis of these costs submitted by Nissan. In that analysis, Nissan provided estimates of the per-vehicle costs and the dollar value of the components and domestic labor that must be shifted from domestic sources to non-domestic sources to reduce the domestic content of the Sentra to less than 75%. A similar analysis was provided for the domestic Altima. Upper bounds of the cost estimates for the two content shifting options appear in Table 1. Although the per-vehicle costs for the two options are similar, the total costs are different due to the number of each automobile produced. Nissan also claims that content shifting must be done to the entire production of a particular model line.

The third option discussed by Nissan was that the company could simply maintain its current product plans and pay whatever CAFE penalties it would incur as a result of its non-domestic fleet failing to meet the standard. For each model year it falls short of the standard, Nissan would need to apply credits, pay a penalty, or, if its credits were not sufficient to address the shortfall, pay penalties and apply credits at the same time. If it were to rely on credits, Nissan would, for each model year it has a shortfall, either need to apply credits it has earned in the three previous model years or file a plan with NHTSA seeking approval to apply credits it would earn in the next three years. See 49 U.S.C. 32903.

The data provided by Nissan related to its non-domestic fleet show that, by MY 2006, the company will not have any credits available from past years, or based on its present product plans, be in a position to file a plan to use credits from future model years. Nissan claims that paying penalties is not a likely course of action: "For a variety of reasons, however, including economic considerations and publicity, Nissan is not likely to pursue this option." (p.13). However, given that a number of manufacturers routinely pay CAFE penalties and doing so may be an option that a rational manufacturer would consider, the agency decided that this option is sufficiently viable for it to be included in the agency's analysis.

For passenger automobiles, CAFE penalties for each model year are calculated by applying a penalty of $5.50 for each tenth of a mile of a gallon that the CAFE for a manufacturer's fleet is less than the current standard of 27.5 mpg and multiplying the resulting figure by the number of automobiles manufactured in that fleet in that year. See 49 U.S.C. 32912(b) and 49 CFR 578.5(h)(2). Nissan provided a projection of its future CAFE performance to the agency in its supplemental submissions. Based on these data, the shift of the Mexican Sentras to the domestic fleet, and Nissan's not taking any other measures to improve non-domestic fleet, we estimated that Nissan's potential CAFE penalty liability ranges from $25.0 million for MY 2006 to $12.0 million in MYs 2008 and 2010. These costs, along with the potential costs of other options we considered as likely to be chosen by Nissan, are summarized in Table 1.

ii. Additional Options Considered by the Agency

NHTSA also considered three additional options that were not identified in Nissan's petition. First, we considered, as the U.A.W. suggested in its comments, the possibility that Nissan could improve its non-domestic fleet average by relocating production of 350ZX and Infiniti automobiles to the U.S., thereby increasing their domestic content above the 75% threshold, and changing their classification to domestic. Relocating production of the 350ZX and Infiniti passenger automobile lines to the U.S. might offset the loss of the Mexican-built Sentras from Nissan's non-domestic fleet. We have determined, however, that no rational, profit-maximizing manufacturer would pursue this strategy.

North American sales of the 350ZX and Infiniti lines are relatively small compared to those of the Sentra, Altima, or Maxima. Relocating production of these vehicles to North America would have several impacts. The plants now producing them would have to closed or used at less than full capacity. Production of the 350ZX and Infiniti lines would have to either be incorporated into existing North American production lines, which may exceed capacity and require substantial investment, or opening. Shifting the production of these automobiles would entail significant capital expenditures to construct a new plant in North America to build them. The expenditures would be in the hundreds of millions of dollars.[16] The shift would also lead to an under-utilization of existing plants in Japan. For these reasons, the agency did not consider it worthwhile to quantify the costs of this option since a profit-maximizing manufacturer would not be likely to choose it.

The agency also considered two options that involve the addition of fuel saving technology to Nissan's non-domestic fleet so that it complies with the CAFE standard. Adding technology to a domestic fleet containing the Sentra would not be necessary, as that fleet would meet the 27.5-mpg standard. To aid it in analyzing what technologies might be added, NHTSA used a report by the National Academy of Sciences (NAS).[17] Responding to a Congressional directive in the FY 2001 DOT Appropriations Act (Pub. L. 106-346.), the NAS completed a review of fuel economy standards in 2002. This review included an examination of technologies that could be used to increase the fuel economy of new light duty automobiles. The NAS did not discuss all possible technologies, but rather listed about two-dozen specific technologies and groups of technologies that it considered as technically feasible and cost-effective. The NAS report has received extensive external review, and is considered to be a reasonable and reliable appraisal of the range of technologies, the resulting improvement in fuel consumption improvement, and costs. A list of these technologies, their costs ranges and resulting improvements in fuel economy appear in Appendix B.

In its analysis, the agency added NAS report fuel efficiency technologies to the technologies already in Nissan's non-domestic passenger automobiles, beginning with those technologies that provided the most improvement for the least cost, and continuing with those technologies that produced progressively less return in fuel efficiency for the incurred cost.[18] Under this methodology, we considered that Nissan would pursue one of two options. One option - which our analysis termed the "technology with cost minimization" approach - would be to add technology until the cost of doing so equals or exceeds the cost of paying penalties. At that point, we assumed Nissan would elect to pay the penalties rather than pay for the relatively more expensive technology. The second option, which takes into account Nissan's representation that it would exhaust other options before paying CAFE penalties, estimated Nissan's costs if it used all available technologies, regardless of cost, to achieve compliance. This approach is termed the "technology only" approach in Table 1.

Our analysis showed that technology with cost minimization option would not yield a significant change in the CAFE of Nissan's non-domestic fleet. Using the mid-range of cost and fuel consumption improvement estimates from the NAS report demonstrated that applying any but the most inexpensive technologies (i.e., use of low friction lubricants) exceeded the costs of paying penalties. Given the relatively low cost of paying penalties instead of investing in more fuel-efficient technologies, we estimated that Nissan would only be able to improve its non-domestic fleet fuel economy by one to five percent under this option. Therefore, if the benefits of better fuel economy are ignored, this option simply becomes the same as the paying-the-penalties option since only a small amount of technology would be used before paying penalties becomes less expensive.

The agency believes that increased fuel-efficiency provides benefits that are valued by consumers. Consumers will realize benefits from lower operating costs if they choose a more fuel-efficient automobile over a less-efficient one. Since this benefit might induce purchasers to choose to buy a Nissan automobile instead of a competitor's product, we assume that Nissan would choose to add additional technology to provide this additional benefit to its potential customers. Under the technology with cost minimization option, Nissan will add technology until the incremental cost of technology, less the benefits of increased fuel economy, exceeds the cost of paying the penalty. This fuel savings benefit was calculated using a price of $1.50 per gallon over a 4.5-year time horizon, discounted at 7%.[19] If Nissan chose to expend additional sums to provide this fuel savings benefit, it would spend more than it would if it simply chose to pay penalties. Table 1 shows annual costs would vary from $32.8 million in 2006 to $19.4 million in 2008. These costs are slightly higher than the technology only option for which total costs range from $19.9 million in 2010 to $44.8 million in 2009. This option uses technology, no matter what the cost, to avoid paying penalties.

Table 1 - Total Cost of Options

(in millions of dollars)

Model

Year

Reduce Domestic Content of Sentra*

Reduce Domestic Content of Altima*

Pay

Penalty

Technology w/

Cost

Minimization

Technology Only

2006

< $10

< $20

$25.0

$32.8

$39.6

2007

< $10

< $20

$13.5

$20.2

$38.3

2008

< $10

< $20

$12.0

$19.4

$43.9

2009

< $10

< $20

$